Reinsurance News

Aon Reinsurance Aggregate reports 104% CR in H1 as RoE sinks

9th September 2020 - Author: Luke Gallin

The Aon Reinsurance Aggregate (ARA) reported a return on equity (RoE) of -1.5% in the first half of 2020 and a combined ratio of 104%, as reinsurers continue to navigate COVID-19-related impacts on both sides of the balance sheet.

Declining reinsurance profitsEarlier today, Aon Reinsurance Solution’s held its virtual reinsurance renewal season press conference in light of the cancellation of the industry’s annual Monte Carlo event.

After opening remarks from the Global Chief Executive Officer (CEO) of Reinsurance Solutions, Andy Marcell, the audience heard from Head of Business Development for the global broker’s reinsurance arm, Mike van Slooten.

Ahead of the launch of the latest ARA report, which examines the performance of 23 leading reinsurers in the first-half of the year that are tracked by Aon, van Slooten shared some key highlights.

Overall, the ARA’s combined ratio has come in at 104.1% in H1 2020, which includes almost 10 percentage points of losses and reserves related to the COVID-19 pandemic. Additionally, a further $1 billion in reserves was seen on the life side, explained van Slooten.

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“So, quite a significant impact, and it’s quite important to look at exactly the methodologies that people have used to calculate those estimates. Generally, this reflects losses incurred up to the end of June. There is a lot of incurred but not reported reserve in there, probably 80% of the total, at this point. So, what you can conclude from that is that we think there is probably going to be more to come,” said van Slooten.

For the ARA, COVID-19 losses booked in H1 amount to $8 billion, which compares to industry loss estimates of $50-$60 billion. According to van Slooten, this suggests that there’s either a lot more to come, or, perhaps the ultimate insurance and reinsurance industry loss isn’t going to be as high as initially feared.

Of course, much uncertainty remains around both the extent of the losses and exactly where they’re going to come from. But despite this, van Slooten said that he’s seen enough to “conclude that the ultimate burden is likely to be manageable as far as the industry is concerned.”

Whether manageable or not, the reality is that the ARA has reported an underwriting loss for the first six months of the year, and the pandemic has also had an adverse effect on the asset side of the balance sheet.

van Slooten noted an investment return of about 2.1% for the cohort, which is actually the lowest since the global financial crisis of 2008. He added that the industry is going to have to adapt business models to manage the lower for longer interest rate environment and the impact this is going to have on investment returns going forward.

“So, we’ve got pressure on the investment side and taking those two things together, the companies that we’re tracking, overall, reported a negative return on equity of minus 1.5%, which was a loss of $1.1 billion,” he said.

Looking forward to the remainder of the year and beyond, van Slooten noted an increased demand for protection as well as improved underwriting discipline, all of which bodes well for the upcoming renewal season.

“As we look at the market as it stands today, we clearly see there is still a lot of capacity in the market. We see a lot of reinsurers who are talking about growth. We have a lot of clients who have the need for additional reinsurance. We’re seeing growing exposures around the world and we’re seeing higher risk awareness, which is translating into a higher demand for reinsurance,” he said.

Adding: “I think there’s every reason to believe that cedants will be able to achieve good outcomes at the end of the year. I think it will be more important to manage those relationships. I think the quality of the data and the interactions with the market will be important.”

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